How To
Price My Product or Service
A step-by-step guide and workbook for value-based pricing
Table of Contents
INTRODUCTION TO VALUE-BASED PRICING
Value-based pricing (VBP) -- a method of setting a price for a product or service by which a company calculates and tries to earn the differentiated worth of its product for a particular customer segment when compared to competing products or services.
Value-based pricing sets the price of your product, service, or experience based on what your customers are willing to pay. When successfully executed, profitability will improve due to premium prices paid by customers while maintaining customer volume.
Certain types of firms lend themselves well to the value-based pricing model. To help you discern whether this fits your business well, complete Activity 1.
Importantly, value-based pricing is customer-centric. It is not about taking advantage of your consumer. Instead, it is about building relationships with your customer base in order to effectively price your product or service at a mutually beneficial price. This educational guidebook and workbook companion will guide you through the process of determining a value-based price for your fitness service.
STEP 1: FOCUSING ON A SINGLE SEGMENT
Customer/market segment -- your customer base and/or your target consumer - i.e. who is your product or service created for?
The first step to approaching VBP is to single out a market segment, focusing on a single consumer segment in the market. If your services span multiple segments, a value-based price is required for each service and its corresponding market segment. For example, the market segment for a small cycling studio is likely different than the market segment for a traditional “big box gym” like the YMCA. While both specialize in providing fitness services, the big box gym’s market segment is customers who appreciate the ability to set their own schedule and don’t require instruction past how to use the treadmill; yet for the cycling studio, its market segment is consists of consumers looking for attentive instructors and a cycling specific workout.
As another illustration, consider a company like Starbucks. Starbucks is not concerned with all coffee drinkers; instead, their segment consists of gourmet coffee drinkers who value extravagant gourmet drinks.
As your business grows and adapts to include new methods of delivering your product -- say a fitness studio offering online or outdoor classes -- be aware that your market segment may also move, informed by your (essentially) different product. Complete Activity 2 to help you better understand your “segment.”
STEP 2: DETERMINING THE NEXT BEST ALTERNATIVE
The next step in determining a value-based price is determining a market price of sorts, which can be aided by answering the question: What is the next best alternative for my product? This works when you have a competitor’s product that your customers could buy instead; for a gym, this will likely be a big-box gym membership at a YMCA or Planet Fitness, but it could also be a boutique fitness studio. While you might be able to answer this on your own, the best way to know for sure is to ask your customers. This brings us to Activity 3.
STEP 3: UNDERSTANDING THE UNIQUENESS OF MY PRODUCT/SERVICE
Value-based pricing is all about putting a value on what makes your product or service special -- different from the next best alternative. Something to remember: your product is not unique simply because of your brand. The YMCA is not more valuable than Planet Fitness simply because of its name. Your uniqueness is derived from the special features and services that set your product or service apart. Use Activity 4 to help you with this step.
STEP 4: VALUATION OF THE “UNIQUENESS” OF MY PRODUCT/SERVICE
STEP 4 is about putting a value to the “uniqueness” of your product or service. An important consideration when placing a premium on the market’s “next best alternative” is that your customer’s will need to agree with this evaluation. If they believe the price is too high, they will not shell out for the premium price that you have set and you run the risk of losing customers. If you set it too low, then you will not be maximizing the revenue you could be from the market, losing out on additional profit.
Once you determine your price premium, you might simply decide to charge this premium. While you have the ability to do so, this could also be considered a short sighted business decision. Raising prices too high could damage the relationship you have built with your customers. For example, if you perceived as someone who is setting prices at the maximum of what people will pay, your customers may develop bad feelings toward your brand. Therefore, it’s important to consider customer relationships and business reputation in setting prices.
Transparency is key in this step. Make sure your customers know why you think your product or service is special, and deserves a premium price. You cannot expect a fair return on your premium price if you are unable to persuasively prove why your product or service merits a special price.
Activity 5 will help you work through this step.
STEP 5: PRICING TACTICS
One of the last things to consider, especially when it comes to value-based pricing, is whether or not to employ any sort of pricing tactic. A pricing tactic is any change from the price that you have set for your product or service -- examples being a sale, discount, surcharge, etc. The mainstream thinking about pricing tactics is identifying consumers, often times with a lower willingness to pay, and then utilizing price discrimination in order to capture the surplus in the market, translating into added revenue in your pocket. This can be done by offering group discounts for seniors or students, for example. Additionally, some businesses identify consumers who have a lower willingness to pay and use a hurdle method to deliver a discounted product--say offering a coupon or other step before providing a lower price. Best business practices stipulate that business owners only employ such practices when they stand to benefit in a demonstrable way, not as a ploy to deceive customers into believing they are receiving a deal on an artificially inflated market price. Even your pricing tactics, as a value-based pricer, should be rooted in well cultivated customer relationships.
A good example employed by fitness institutions, which could be valuable during the COVID-19 pandemic, is a first use discount. This could take many forms, but it essentially allows a customer to try your product or service at a discounted price. This is very useful if you have transitioned to an alternative method of delivering your products and services -- e.g. a fitness institution offering online or outdoor classes noticies some apprehension from new or old customers to try these (essentially) new offerings. A discounted first class could offer them a low stakes trial, which could translate into continued business for your firm.
While there is no accompanying activity for this step, it could be wise to consider and research various pricing tactic options and whether they fit your business model.
How to price my product?
Workbook Companion
ACTIVITY 1: THOUGHT EXERCISE
Is value-based pricing for me?
Answer the following questions. They will attempt to help you determine if value-based pricing is a good fit for your business.
Q1: Based on the description of value based pricing provided in the INTRODUCTION, do I believe my business fits this pricing model?
Q2: Is my product unique enough that I believe a majority of my customers are not price sensitive? In other words, if I increased my prices, to what extent do I think my customers would seek an alternative product?
Q3: Is my product unique primarily because of costly equipment investments?
Q4: Did I invest a lot of resources (financial, time, etc.) into the development of my product or service? For example, a unique exercise method that is only offered at my business?
Q5: What makes my product or service customer-centric? Is my product/service providing equipment or is there something more? What is the extra value in having a relationship with my business?
ACTIVITY 1: THOUGHT EXERCISE
Is value-based pricing for me?
If your answer to Q1 was…YES, then this workbook will aim to help you through the process of value-based pricing. NO, then you are encouraged to research other pricing methods. You can always come back to this resource for reference.
If your answer to Q2 was…YES, then your business lends itself to a value-based pricing model. Your customers frequent your business due to the unique value you provide. NO, your customers do not recognize the extra value of your product and will search for a lower-cost alternative to your product - value-based pricing will likely not work for your business.
If your answer to Q3 was…YES, then value-based pricing is likely not for you. If your value is based on the equipment you provide instead of the uniqueness of your service then it will be difficult to utilize a value-based method as your customers can seek the same service at many other institutions. NO, then there must be something special about your business that provides a sort of value that can be utilized when designing a value-based pricing scheme.
If your answer to Q4 was…YES, then this indicates that there is likely some inherent value that only your business can provide; you invested a lot in making your product unique lending it to value-based pricing. NO, then maybe another pricing method fits your business better.
If your answer to Q5 was…YES, then your business lends itself to value-based pricing. VBP depends on strong customer relationships; without such relationships, it can be difficult to employ this pricing model. NO, then maybe another pricing model would work better.
Complete the following statement: I do/do not believe that value based pricing is suitable for my business.
ACTIVITY 2: THOUGHT EXERCISE
What is my segment?
Take a moment to reflect on the following questions. If needed, you can reference STEP 1.
Q1: Who are my customers?
Q2: What do my customers appreciate when they see my product/service and similar product/services?
Q3: What does my ideal customer look like? When I am preparing my marketing materials, who am I targeting?
Q4: How does my delivery method inform what type of customers seek my product?
Q5: Consider the example laid out in STEP 2 and complete the following statement: My customer segment is...
ACTIVITY 3: CUSTOMER CONSULTATION
What is the “next best alternative” to my product/service?
There are many ways to identify the “next best alternative” to your product/service. One way would be to conduct formal or informal interviews. Maybe you just ask your patrons to complete a small survey after a workout session. Either way, value-based pricing requires you find a way to consult your customers. The following questions are designed to be a starting point with the purpose of extracting the right information. Feel free to take your time on this activity -- a week, two, or even a month.
The following information will detail the type of intuition each question is attempting to build.
Q1: This set of similar questions is attempting to determine your customers’ “next best alternative.” Alternative businesses that your customer provides will serve as benchmarks when you consider your uniqueness and prices in the context of the market.
Q2: This question is attempting to highlight what makes the offerings of your business unique. While you might have some ideas, your customers offer a different -- and possibly more valuable -- perspective. You will use this information in ACTIVITY 4.
Q3: This question is attempting to clue you into where your product falls in the context of the market. Is your product more or less valuable in comparison to your customers’ next best alternative.
Q4: This final question is trying to help build the “by how much” evaluation you will build in ACTIVITY 5.
After you have consulted with your customers, go back and reflect on their answers. Keep in mind the answer you gave in ACTIVITY 2 to Q3. As you go through the information you collected, give more weight to responses given by target customers. These are the customers you want -- their input should matter more to you.
As you continue to look over the responses from your customers, consider the following questions:
What were the most common alternatives given?
Which ones had higher prices and which had lower?
Did your customers mention a free online option like youtube?
Where do I fall in the context of these businesses? Consider drawing a line and placing each of the businesses on it. Where do you fall?
Am I more unique than competitor businesses? What makes me different?
ACTIVITY 4: THOUGHT EXERCISE
What makes my product unique?
Q1: When I developed my product, did I invest a lot of resources into the development of my product? How does this differentiate my product from others in the market?
Q2: What void in the market did my product fill when I went into business?
Q3: Take some time to look over your marketing materials, website, and other literature you give to customers or prospective customers. What are you saying to them in these materials about how your product/service is special?
Q4: What did your customers say when you surveyed them? What did they think made you different than their next best alternative?
Complete the following statement based on your responses. My business is unique because…
ACTIVITY 5: CUSTOMER CONSULTATION AND THOUGHT EXERCISE
How do I gauge my customers’ expectation of a fair price?
Consider asking your customers another set of questions such as:
This set of questions is attempting to build a range of prices that can be set for your product. Ultimately, you shouldn’t charge a price too far outside the range of your customers’ responses, as they will not pay a price that deviates too far from what they are willing to pay. You can get this information from your customer through a variety of methods; a simple feedback survey, focus group, or individual interviews are just a few of your options. Consider the best fit for your business and your customer base.
After synthesizing your customers’ responses, consider the following question: Where do you want your business to fall on this line?
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Low Price (Q1)
High Price (Q3)
Boarderlie Price (Q2)
Free
$0.00
What do I think a fair premium to charge would be?
Take some time to do some research on the most common alternatives that your customers provided. The following exercise will attempt to help contextualize your business’ product/service in the market. On the line, place the next best alternatives in order of their price. This has been started for you to help you begin. Then, answer the questions below.
Q1: Consider the most common next best alternative. What makes your product different from this next best alternative? What have your customers said about why they frequent your business as opposed their next best alternative?
Q2: Consider the differences that you identified in Q1. Do these differences add value to your product or is your competitor’s product more valuable?
Q3: What is my customer’s expectation of a fair price considering ACTIVITY 5?
Q4: Finally, after careful consideration of your responses, place your business on the line. Where do you fall in terms of quality in the context of your market? Where does this put your business in the context of the prices in the market? Utilize this answer to finalize a value-based price.
Free/Low Cost Alternative
High Price Alternative
SYNTHESIZING ACTIVITY: PUTTING IT ALL TOGETHER
This section of the workbook aims to be a one-stop shop for all of your responses, so they are easily referenced, while further analyzing the important data you collected. Go through the following exercises and feel free to copy some of the responses that you provided earlier.
COMPLETE THE FOLLOWING STATEMENTS:
I DO/DON’T believe that value based pricing is suitable for my business.
My market segment is:
The most common next best alternatives are the following:
My product/service is unique because...
I fall above the following options in the market in terms of quality/uniqueness:
I fall below the following options in the market in terms of quality/uniqueness:
The fair range of prices my customers are willing to pay is between the following values:
Considering my unique qualities and where I fall in the context of the market in terms of quality and price, I believe my product should be priced at:
I DO/DON’T believe that my business would benefit from any sort of pricing tactic. If so, I think that the following tactic will accomplish what I would like it to:
This guidebook was developed based on the following resources:
Anderson, J. C., Wouters, M. J. F., & van Rossum, W. (2010). Why the highest price isn't the best price. MIT Sloan Management Review, 51(2), 69-76. Retrieved from https://proxy.lib.umich.edu/login?url=https://search-proquest-com.proxy.lib.umich.edu/docview/224960659?accountid=14667
Dholakia, Uptal M. (2016). A Quick Guide to Value-Based Pricing. Harvard Business Review. Retrieved from https://hbr.org/2016/08/a-quick-guide-to-value-based-pricing
In addition, a special thanks to the valuable help provided by local businesses and community members at the Detroit Neighborhood Entrepreneurs Project, +Impact Studio for Local Business @ Michigan Ross, and the Center on Finance, Law, and Policy.